Can an Inherited IRA Be Rolled Over?

IRA documents

If you inherit an individual retirement account (IRA) from a spouse, you can treat it like your own IRA or roll it over into a traditional IRA you already have. If you are the beneficiary of an IRA inherited from someone other than your spouse, the options are different. You can’t roll it over into an existing IRA. However, you can transfer it into a new IRA, if you satisfy certain requirements. In either case, failing to follow the rules can result in the IRA being treated as a taxable distribution. A financial advisor can guide you as you deal with an inherited IRA so that you don’t needlessly incur any tax liabilities.

Inheriting an IRA From a Spouse

The owner of an IRA can designate anyone to be the beneficiary of an IRA or other account after the owner’s death. Often, the beneficiary is the surviving spouse. Then the beneficiary has some choices.

First, the surviving spouse can name himself or herself as the owner of the inherited account. In this event, it will be as if the surviving spouse had always owned the account. The same distribution rules will apply.

Second, the new owner can roll it over into an existing IRA. This can be a traditional IRA or, after conversion, a Roth IRA. Any taxable distributions can be rolled over into another plan, such as a qualified employer retirement plan, a 401(a) or 403(b) annuity plan or a state or local government’s 457(b) deferred compensation plan.

If the rollover route is selected, it can be accomplished by a direct trustee-to-trustee transaction.

Or it can be done by taking the funds from the account as a distribution and then depositing the funds into another IRA within 60 days. Waiting longer than 60 days to re-deposit the funds into an IRA risks having the distribution taxed like income.

The most desirable way is to use the direct trustee-to-trustee transaction. This can be set up in advance if the wishes of the original owner regarding the inheritance are known.

The age of the beneficiary determines how the inherited IRA will be taxed. That means, for instance, any distributions before age 59 ½ will get charged a 10% penalty in addition to being subject income taxes. And starting at age 72, the beneficiary will have to start taking the annual required minimum distributions (RMDs.) If a beneficiary was 70.5 or older on Dec. 31, 2019, he or she has to start taking RMDs immediately.

Inheriting From a Non-Spouse

Man working on household finances

If you inherit an IRA from someone other than your spouse, you can’t just roll it over. In this case, the usual approach is to open a new IRA called an inherited IRA. This IRA will stay in the name of the deceased person and the person who inherited it will be named as beneficiary. The inheritor can’t make any contributions to the inherited IRA or roll any funds into or out of it.

The funds can’t just stay in the inherited IRA forever, or even until the new beneficiary reaches the age at which they’d have to start being withdrawn. In most cases, all the funds have to be distributed within 10 years of the original owner’s death. If it’s a Roth IRA, all the interest usually has to be distributed within five years of the owner’s death.

Rather than opening an inherited IRA, the person who inherited the IRA can take a lump sump distribution. Even if the person is younger than 59 ½, the distribution won’t be subject to the usual 10% penalty for an early withdrawal. However, the distributed funds will be subject to income taxes.

Bottom Line

Retired couple on a beachInheriting an IRA from a spouse means the beneficiary can simply name himself or herself as new owner of the account and treat it as if it had been theirs all along. Or the bereaved spouse can roll the funds into a new account. If the inheritor is someone other than a spouse, the usual approach is to set up an inherited IRA, keeping the original owner’s name on the account and naming the inheritor as the beneficiary. But sometimes it makes more sense to disclaim an inherited IRA if, for example, the inherited funds would mean the beneficiary’s estate would be so large it would incur the federal estate tax. In the event an IRA is disclaimed, the funds would go to other beneficiaries named on the account.

Tips for Handling IRAs

  • If you inherit an IRA or expect to – especially if your benefactor is someone other than your spouse – consider discussing the best way to handle it with an experienced financial advisor. Finding one doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • One factor in deciding whether to claim and how to claim an inherited IRA is how much you will get from Social Security. That’s where a free, easy-to-use retirement calculator comes in very handy.

Photo credit: ©iStock.com/designer491, ©iStock.com/shapecharge, ©iStock.com/dmbaker

The post Can an Inherited IRA Be Rolled Over? appeared first on SmartAsset Blog.

Source: smartasset.com

75 Personal Finance Rules of Thumb

A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.

The Basics

These basic personal finance rules of thumb apply to everybody. They’re simple and universal.

1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)

2. Insurance protects wealth. It doesn’t build wealth.

3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.

4. Time is money. Wealth is a measure of how much time your money can buy.

5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.

6. Keep an eye on your credit score. Check-in at least once a year.

7. Converting wages to salary: $1/per hour = $2000 per year.

8. Don’t mess with City Hall. Don’t cheat on your taxes.

9. You can afford anything. You can’t afford everything.

10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.

Budgeting

I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.

11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.

12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.

13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.

14. Don’t mix savings and checking. One saves, the other spends.

15. Children cost about $10,000 per kid, per year. Family planning = financial planning.

16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?

Investing & Retirement

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

18. People who invest full-time are smarter than you. You can’t beat them.

19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.

22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

28. $1 invested in stocks today = $10 in 30 years.

29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

30. Stocks earn 7% per year, after adjusting for inflation.

31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”

Home & Auto

For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.

33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.

34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.

35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.

36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!

37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.

38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.

39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.

40. Set aside 1% of your home’s value each year for future maintenance and repairs.

41. The average car costs about 50 cents per mile over the course of its life.

42. Paying interest on a depreciating asset (e.g. a car) is losing twice.

43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.

44. Pay cash for cars, if you can. Paying interest on a car is a losing move.

45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.

46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.

Spending & Debt

Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.

47. Pay off your credit card every month.

48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.

49. When making a purchase, consider cost-per-use.

50. Make your spending tangible with a ‘cash diet.’

51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.

52. Buying experiences makes you happier than buying things.

53. Shop by yourself. Peer pressure increases spending.

54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.

55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.

56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.

57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).

58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).

59. Aim to keep your student loans less than one year’s salary in your field.

The Mental Side of Personal Finance

At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.

60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.

61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.

62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.

63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.  

64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.

65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.

66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.

67. Savor what you have before buying new stuff. Consider the fulfillment curve.

68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.

69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.

70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).

71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.

72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.

73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.

74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.

75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!

The Last Personal Finance Rule of Thumb

Last but not least, an investment in knowledge pays the best interest.

Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

Source: bestinterest.blog

Paying Off Debt to Buy a House

A brown brick house at sunset

When you buy a house, a big part of a lender’s decision whether to approve your mortgage rests on whether or not you can afford it.If you have a lot of debt, the monthly payments on those obligations chip away at the total amount you can pay each month on a mortgage.

But that doesn’t mean it’s impossible to buy a house if you’re in debt. It’s just a bit more challenging. If you want to stop paying rent and enter the exciting world of homeownership, here’s how you can pay off debt to buy a house.

1. Calculate Your Debt to Income Ratio

Your debt-to-income ratio, often called DTI ratio, is a measurement that compares the amount of debt you have to your income. It helps determine how much you can actually afford when it comes to mortgage payments.

How Much Debt Can You Have and Still Qualify for a Mortgage?

Most lenders won’t approve you if your DTI is higher than around 43%.

For example, let’s say you make $52,000 a year. This means your gross income each month is around $4,333. If half your paycheck is devoted to paying off debts, then about $2,166 of your income goes towards paying off your various debts.

By these numbers, your DTI would be 50%. The bank would probably not approve you for a mortgage since your DTI is higher than the maximum 43%. To fix this problem, you can do one of two things: start making more money and/or lower your monthly recurring debt payments.

2. Find Ways to Decrease Your Debt

Consolidate Loans

Qualifying for a mortgage partially depends on what part of your monthly gross income is paid towards the minimum amount due on recurring bills. These might include credit card bills, student loan payments, car loans and other payments. Consolidating can be a way to reduce that amount.

What does consolidating mean? Consider an example where you have five credit card payments each month. Consolidating them means that instead of making five separate payments to individual lenders, you make onepayment each month.

If your credit is good enough, you may be able to get a consolidation loan with better terms. That means your one consolidated payment may be lower than the five payments combined. You can consolidate student loans, too, and get the same potential benefits.

After you’ve consolidated, you can re-calculate your DTI ratio. If it’s lower, you may fall below the DTI threshold required to be approved for a mortgage.

Pay Off or Pay Down Some Debt

If you make an effort to pay off or pay down some of your existing debt, this can help decrease your DTI ratio and make your financial picture look more favorable to lenders. It may be best to concentrate on paying off recurring debts, such as credit cards, to help your chances.

Is It Best to Pay Off Debt Before Buying a House?

There’s no one right answer to this question. It can depend on your mortgage lender. Your mortgage lender may want you to pay off debt before making a down payment while others may be okay with your DTI and want a larger down payment. If you’re under the 43% DTI and have a good credit history, you might consider working with a mortgage lender to find out what your options are.

Credit Repair

If any debts listed on your credit report aren’t yours, this could be hurting your overall financial health. Make sure to closely examine the details of your credit report and make sure the accounts listed are actually ones you’re responsible for. If you do notice errors on your credit report, you can work to repair your credit by disputing the entries.

3. Find Ways to Increase Your Income

One of the ways to make your DTI more favorable is to increase your income. You can usually do this by either getting a better paying job or by getting a second job if you have the means. If you’re married and are applying for a mortgage with your joint income, perhaps your spouse can get a job to help increase their income. One drawback to this solution is that it’s a long-term solution and not a short-term one. Getting a new job, whether primary or secondary, takes time and effort.

4. Consider Making a Down Payment

Contrary to popular belief, a 20% down payment on a home isn’t required in many cases. FHA loans, for instance, only require 3.5% down, and some mortgage lenders may only ask for 5% down on a conventional loan.

However, keep in mind that the more you put down upfront, the less your monthly payments are and the lower your interest rate is likely to be. If you can put more money down, it makes the mortgage more affordable. If you’re hovering at the higher end of an acceptable DTI ratio, that may make a difference.

Looking at the Big Picture

When you’re ready to buy a house, it’s important to consider your level of debt, how much money you have coming in and your job security. If you’re able to consolidate your debt and get lower monthly payments as a result, your job is well-paying and seems secure and your credit is excellent, you can probably buy a home even if you have other debts.

Assess the Risks

Remember that just because you might qualify for a home loan doesn’t mean you should buy a house. Stretching your limits to meet that 43% DTI ratio can be risky unless you foresee your income continuing to rise oryou know any debt obligations you have are set to be paid off in the future.

Can Paying Off Debt Hurt My Credit Score?

Most of the time, paying off debt has a neutral or positive impact to your credit score. First, you decrease your credit utilization, which accounts for 30% of your credit score. A lower credit utilization can bring up your score. Second, you show the lender that you have the means to pay off debts, which can be a positive factor in whether you’re approved.

However, in a few cases, paying off debt could lower your score. If you pay off old accounts, you could change the age of your credit. How old your accounts are play a role in your score. You could also reduce your credit mix, which also factors into your score.

Neither of these factors plays as large a role as credit utilization, though. And if your mortgage company wants to see you with less outstanding debt, a tiny and temporary hit to your credit score may be worth getting approved for a loan.

To find out more about your credit score and where you stand with financial health, sign up for a free Credit Report Card today. You’ll get feedback about the five major areas that impact your score and how you can improve them before applying for a mortgage.

The post Paying Off Debt to Buy a House appeared first on Credit.com.

Source: credit.com

First Time Home Buyer Programs for Veterans

Numerous programs exist to help veterans and service members who are first-time buyers with their closing costs and other expenses.

Indeed, it’s perfectly possible for those who are eligible for VA home loans to become homeowners with very little — or even nothing — in the way of savings.

Check today's VA rates by completing this quick online form.

Advantages of VA home loans for first-time buyers

The most famous housing benefit associated with the VA loan program is the zero down payment requirement. That can be hugely valuable for first time home buyers.

But it’s just one of a whole range of advantages that come with a VA home loan. Here are some more.

Low mortgage rates for VA loans

According to the Ellie Mae Origination Report, in October 2020, the average rate for a 30-year, fixed-rate mortgage backed by the VA was just 2.75%. That compares with 3.01% for conventional loans (ones not backed by the government) and 3.01% for FHA loans.

So VA home loans have lower rates. And that wasn’t just a one-time fluke. VA mortgage rates are lower on average than those for other loans — month after month, year after year.

Lower funding fees for first-time buyers

When you buy a home with a VA loan, you need to pay a funding fee. However, you can choose to pay it on closing or add it to your loan so you pay it down with the rest of your mortgage.

But, as a first-time buyer, you get a lower rate. For you, it’s 2.3% of the loan amount (instead of 3.6% for repeat purchasers) if you make a down payment between zero and 5%.

That’s $2,300 for every $100,000 borrowed, which can be wrapped into the loan amount. It’s a savings of $1,300 per $100,000 versus repeat buyers.

Put down more and your funding fee drops whether or not you’re a first-time buyer. So it’s 1.65% if you put down 5% or more, and 1.4% if you put down 10% or more.

Although it might seem like just another fee, the VA funding fee is well worth the cost since it buys you the significant financial benefits of a VA home loan.

No mortgage insurance for VA loans

Mortgage insurance is what non-VA borrowers usually have to pay if they don’t have a 20 percent down payment. Private mortgage insurance typically takes the form of a payment on closing, along with monthly payments going forward.

That’s no small benefit since mortgage insurance can represent a significant amount of money. For example, FHA home buyers pay over $130 per month on a $200,000 loan — for years.

Mortgage insurance vs funding fee

Let’s do a side-by-side comparison of the mortgage insurance vs. funding fee costs of a $200,000 loan:

  VA Loan FHA Loan
Payable on closing $4,600* $3,500
Payable monthly $0 $133 per month**
Paid after five years (60 months) $4,600 $11,500

*First-time buyer rate with zero down payment: 2.3%. $200,000 x 2.3% = $4,600
** $200,000 loan x 0.8% annual mortgage insurance = $1,600 per year. That’s $8,000 over five years. $1,600 divided by 12 months = $133.33 every month

It’s clear that mortgage insurance can be a real financial burden — and that the funding fee is a great deal for eligible borrowers.

Better yet, that makes a difference to your buying power. Because, absent mortgage insurance, you’re $133 a month better off. And that means you can afford a higher home purchase price with the same housing expenses.

Ready to buy a home? Start here.

Types of first-time homebuyer programs for VA loans

You may find two main types of assistance as a first-time buyer:

  1. Down payment or closing cost assistance
  2. Mortgage credit certificates

Down payment and closing cost assistance

There are thousands of down payment assistance programs (DAPs) across the United States and that includes at least one in each state. Many states have several.

Each DAP is independent and sets its own rules and offerings. So, unfortunately, we can’t say, “You’re in line to get this …” because “this” varies so much from program to program.

Some help with closing costs as well and down payments. Some give you a low-interest loan that you pay down in parallel with your main mortgage. Others give “forgivable” loans that you don’t pay back — providing you stay in the home for a set period. And some give outright grants: effectively gifts.

Mortgage credit certificates (MCCs)

The name pretty much says it all. In some states, the housing finance agency or its equivalent issues mortgage credit certificates (MCCs) to homebuyers — especially first-time ones — that let them pay less in federal taxes.

The Federal Deposit Insurance Corporation explains on its website (PDF):

“MCCs are issued directly to qualifying homebuyers who are then entitled to take a nonrefundable federal tax credit equal to a specified percentage of the interest paid on their mortgage loan each year. These tax credits can be taken at the time the borrowers file their tax returns. Alternatively, borrowers can amend their W-4 tax withholding forms from their employer to reduce the amount of federal income tax withheld from their paychecks in order to receive the benefit on a monthly basis.”

In other words, MCCs allow you to pay less federal tax. And that means you can afford a better, more expensive home than the one you could get without them.

Speak with a mortgage specialist today.

Dream Makers program

Unlike most DAPs, the Dream Makers Home Buying Assistance program from the PenFed Foundation is open only to those who’ve provided active duty, reserve, national guard, or veteran service.

You must also be a first-time buyer, although that’s defined as those who haven’t owned their own home within the previous three years. And you may qualify if you’ve lost your home to a disaster or a divorce.

But this help isn’t intended for the rich. Your income must be equal to or less than 80% of the median for the area in which you’re buying. However, that’s adjustable according to the size of your household. So if you have a spouse or dependents, you can earn more.

It’s all a bit complicated. So it’s just as well that PenFed has a lookup tool (on the US Dept. of Housing and Urban Development (HUD’s) website) that lets you discover the income limits and median family income where you want to buy.

What help does the Dream Makers program offer?

You’ll need a mortgage pre-approval or pre-qualification letter from an established lender to proceed. But then you stand to receive funds from the foundation as follows:

“The amount of the grant is determined by a 2-to-1 match of the borrower’s contribution to their mortgage in earnest deposit and cash brought at closing with a maximum grant of $5,000. The borrower must contribute a minimum of $500. No cash back can be received by the borrower at closing.”

So supposing you have $2,000 saved. The foundation could add $4,000 (2-to-1 match), giving you $6,000. In many places, that might easily be enough to see you become a homeowner.

You don’t have to use that money for a VA loan. You could opt for an FHA or conventional mortgage. But, given the advantages that come with VA loans, why would you?

The Dream Makers program is probably the most famous of those offering assistance to vets and service members. But there are plenty of others, many of which are locally based.

For example, residents of New York should check out that state’s Homes for Veterans program. That can provide up to $15,000 for those who qualify, whether or not they’re first-time buyers.

Start your home buying journey here.

State-By-State Home Buyer Assistance Programs

We promised to tell you how to find those thousands of DAPs — and the MCC programs that are available in many states.

It takes a little work to find all the ones that might be able to help you. But you should be able to track them down from the comfort of your own home, online and over the phone.

A good place to start is the HUD local homebuying programs lookup tool. Select the state where you want to buy then select a link and look for “assistance programs.”

Your best starting point is probably the state’s housing finance office though it might be called something slightly different. You should find details of programs or just a list of counties with phone numbers. Call the number where you want to buy, explain your situation and ask for advice. It’s their agents’ jobs to point you to local, state, or national programs that can help you.

If you look in the right place, you could secure some very worthwhile financial help to assist you in buying your first home.

Check today's VA rates by completing this quick online form.

Source: militaryvaloan.com

A Comprehensive Guide to 2020 Tax Credits

Couple preparing tax returnsEvery year, people’s lives change in ways that affect their taxes. They may start a higher education program or have a child, and others take on elderly parents as dependents. These situations can change their eligibility for tax credits. In addition, federal, state and local governments sometimes adjust rules about credits, so it is crucial to understand what credits you can take. Navigating the world of tax credits and deductions can be confusing. That is why a trusted financial advisor can help you find every tax credit you are entitled to.

What a Tax Credit Is (and Isn’t)

Tax credits encourage people to spend money by giving them credit toward that expense. For example, one of the most common tax credits is the Child Tax Credit. Taxpayers who have children under the age of 17 receive a credit to help reduce the cost of raising a child. Another popular tax credit is the Lifetime Learning Credit (LLC). The LLC encourages people to pursue further education by crediting part of the overall cost back at tax time.

A tax deduction lowers one’s taxable income, thus reducing the tax liability. If a person receives a deduction, he decreases the amount from his income, which lowers his taxable income. The lower a person’s taxable income, the lower the tax bill.

By contrast, a tax credit decreases the tax bill rather than a person’s taxable income. So, if a person has a $100,000 salary and has a $10,000 deduction, the taxable income will be $90,000. If the person in this example is taxed at a rate of 25%, the tax bill will be $22,500. If that same person has a $10,000 credit instead of a deduction, he will be taxed at 25% of their $100,000 income and owe $25,000 in taxes. However, he will then be credited $10,000 and owe only $15,000.

Some tax credits are refundable, but most are not. A refundable tax credit, which is different from a tax refund, can be given to taxpayers even if they do not owe any taxes. Additionally, a refundable tax credit can be given in addition to a tax refund. A nonrefundable tax credit means that a person will get the tax credit up to the amount owed. For example, if a person owes $2,000 in taxes and receives $3,000 in nonrefundable credits, that will simply erase her tax bill. If she gets $3,000 in refundable credits, she will receive a $1,000 tax refund.

Some common tax credits for individuals include:

  • Child Tax Credit
  • Earned Income Tax Credit
  • Credit for Other Dependents
  • Adoption Credit
  • Low-Income Housing Credit
  • Premium Tax Credit (Affordable Care Act)
  • American Opportunity Credit
  • Lifetime Learning Credit

Child Tax Credit

The Child Tax Credit is a refundable credit up to $1,400 and offers up to $2,000 per qualifying child age 16 or younger. Parents of children who are 16 or younger as of Dec. 31, 2020, can qualify for this tax credit. For someone to be eligible for the Child Tax Credit, the modified adjusted gross income must be under $400,000 if the parents of the child(ren) file jointly and $200,000 for any other person filing.

Additional requirements to qualify for the child tax credit include that the person filing must have provided at least half of the child’s support in the calendar year, and the child must have lived with the person filing for at least half the year. There are some exceptions to this rule, and it is best to discuss the child tax credit with a tax advisor.

Child and Dependent Care Credit

The cost of childcare, eldercare and other in-home care in the U.S. is high and tends to rise each year. If a couple is married and files jointly and has paid expenses for the care of a qualifying child or dependent so that one or both can work, they are likely eligible for the Child and Dependent Care Credit.

To qualify for the Child and Dependent Care Credit, the taxpayers must have received taxable income. This is because the credit is designed to help individuals who need to hire a caretaker to stay in the workplace.

Additionally, there are several qualifiers on the person being cared for. A child must be under age 13 when the care was provided. A qualifying spouse must be unable to take care of himself and have lived in the taxpayer’s home for at least half the year. A qualifying dependent must be physically or mentally incapable of caring for himself, have lived with the taxpayer for at least half the year and is either a dependent or could have been a dependent of the taxpayer. A taxpayer can claim up to $3,000 of expenses for one child or dependent and up to $6,000 for two or more children or dependents.

There are limits on who can provide care to qualify for this tax credit. The caregiver must not have been the taxpayer’s spouse, a parent of the child being cared for or anyone else listed as a dependent on the tax return. Additionally, the caregiver can’t be a child of the taxpayer.

Any child support payments you’ve received won’t be counted as taxable income. And if you’re the one making the child support payments, the income you used to do so won’t be tax deductible.

Federal Adoption Credit

Families that grow through adoption might be eligible for the Federal Adoption Tax Credit. Adoption can be an expensive process, and as families take on the burden of legal fees and more, the Federal Adoption Credit can help to decrease the burden when filing taxes.

To be eligible for the full credit, adoptive parents must earn $214,520 or less, regardless of their filing status. The credit is up to $ 14,300 per eligible child. An eligible child is any person under the age of 18 that is mentally or physically unable to take care of themselves. Eligible expenses include court costs, attorney fees, home studies and other travel expenses related to the adoption. The Federal Adoption credit is nonrefundable, so it will not produce a refund.

There are several rules for the Federal Adoption Credit, so it is important to speak with your tax advisor before claiming this credit. For example, if you received employer-provided adoption benefits, you may not claim the same expenses that were covered by your employer for the Federal Adoption Credit.

Credit for Other Dependents

Form 1040

The Credit for Other Dependents is a tax credit available for taxpayers who do not qualify for the Child Tax Credit. For example, someone who has a child age 17 or older or has other adult dependents with an Individual Taxpayer Identification Number might qualify for this credit. This tax credit amount is $500 for each dependent that qualifies for the tax credit. The credit is available in full to a taxpayer who earns $200,000 or less and decreases on a sliding scale as that person’s income increases.

An example of someone eligible for the Credit for Other Dependents is a single person filing who has a child dependent that is 17 years old and another child who is 21 and in college. Both children would likely qualify as dependents, and each would be eligible for the $500 credit. Another example is if someone has an adult relative living with him listed as a dependent on his tax return. In any case, the dependent must be a U.S. citizen, national or resident alien.

Lifetime Learning Credit

To promote education in the United States, the IRS created a tax credit called the Lifetime Learning Credit (LLC). This credit is for qualified tuition and expenses paid for qualified students at qualified institutions in the United States.

To claim the LLC, a person, their spouse or their dependent must pay qualified higher education expenses. Additionally, the student must be enrolled at an eligible educational institution. Eligible educational institutions are colleges, technical schools and universities offering education beyond high school. All qualified educational institutions are eligible to participate in a student aid program run by the U.S. Department of Education. The IRS publishes a list for people to search if their school is a qualified educational institution.

To receive the LLC, a person must have received a 1098-T tuition statement from the higher education institution. The credit is worth 20% of the first $10,000 that a person spends at the higher education institution. For example, if a person started school at a university in the fall semester and tuition cost $10,000 or more, that person would receive a credit of $2,000. The LLC is not refundable, so a person can use the credit for taxes who owe but will not receive the credit as a refund.

Additionally, the LLC has income limits. In 2020, a person’s income must be $69,000 or lower if filing single and less than $138,000 if filing jointly to receive any of the LLC. To be eligible for the full LLC amounts, a person can earn up to $118,000 filing jointly or $59,000 filing single.

The Retirement Contribution Savings Credit

The Saver’s Credit, or the Retirement Contribution Savings Credit, has been around since the early 2000s. It was created to help low- and moderate-income individuals save for retirement. Depending on a taxpayer’s income, the Saver’s Credit is worth 10%, 20% or 50% of her total savings contribution up to $1,000, or $2,000 if a person is filing jointly.

For example, if a person is filing single, her income qualifies her for the 50% credit tier, and if she contributes $2,000 to an IRA, she can receive a credit of $1,000. The maximum credit is $1,000, so if the same person decides to contribute $2,500 to an IRA, she will still receive a $1,000 tax credit.

Earned Income Tax Credit

An Earned Income Tax Credit (EITC) reduces the tax bills for low- to moderate-income working families. The credit ranges from $538 to $6,660 depending on a taxpayer’s filing status, how many children they have and their earned income. This amount changes every year, so be sure to verify the EITC with a tax advisor or verify with the IRS.

To qualify for the EITC, a taxpayer must have earned taxable income from a company, running a farm or owning a small business. People who do not earn an income, are married filing separately or do not have a Social Security number are not eligible for this credit. Additionally, people who earned over $3,650 in investment income are ineligible for this tax credit.

To earn the maximum EITC, a single filer can earn $50,594 or less, and a joint filer can earn $56,844 or less and have three or more dependent children. The amount of the EITC credit decreases if a taxpayer has fewer children.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is available to eligible students in the first four years of higher education. Students must be pursuing a degree or other recognized credential, be enrolled at least half time for at least one academic period or semester, not have received the AOTC or the Hope credit for more than the past four years and not have a felony drug conviction at the end of the tax year.

Students may receive up to $2,500 of credit for the AOTC. The credit is refundable up to 40%, so if a student is eligible for the full $2,500 and receives a tax return, the student can receive up to $1,000. The credit is awarded for 100% of the first $2,000 of qualified educational expenses and 25% of the next $2,000 of educational expenses. Therefore, if a student pays at least $4,000 in educational expenses, he will receive the full $2,500.

To prove they are eligible, students must receive a 1098-T from their educational institution. A taxpayer’s modified adjusted gross income must be $80,000 or less, or $160,000 or less for a married couple filing jointly to receive the full AOTC. If the student is a dependent, the taxpayer may claim the AOTC when filing taxes.

An example of someone claiming the AOTC is a parent who earns $79,900 and has a student in the first four years of a degree program. Another example of someone eligible is a student who is not a dependent of anyone and works part-time, earning $80,000 or less. If you are unsure if you or your family qualifies for this tax credit, be sure to speak with a tax advisor.

The Takeaway

IRS buildingThere are many tax credits that American taxpayers can take advantage of. These credits were created to encourage spending in specific areas of the economy and help low- and moderate-income families prosper. In addition to tax credits, there are plenty of other ways to keep more money in your pockets during tax season. Be sure to check out the IRS website to learn more about other tax credits, including the Residential Energy Efficient Property Credit, Foreign Tax Credit and more.

Tips on Taxes

  • Navigating the world of tax deductions and credits can be cumbersome and confusing. That is why it is so valuable to work with a financial advisor. Finding one doesn’t have to be difficult. SmartAsset’s matching tool can connect you with several financial advisors in your area within minutes. If you’re ready, get started now.
  • Using a free tax return calculator can help confirm that you did your arithmetic correctly … or indicate that you may have missed a credit or deduction.

Photo credit: ©iStock.com/grejak, ©iStock.com/Ridofranz, ©iStock.com/Pgiam

 

The post A Comprehensive Guide to 2020 Tax Credits appeared first on SmartAsset Blog.

Source: smartasset.com

What Is the Self-Employment Tax?

Working for yourself, either as a part-time side hustle or a full-time endeavor, can be very exciting and financially rewarding. But one downside to self-employment is that you're responsible for following special tax rules. Missing tax deadlines or paying the wrong amount can lead to expensive penalties.

Let's talk about what the self-employment or SE tax is and how it compares to payroll taxes for employees. You’ll learn who must pay the SE tax, how to pay it, and tips to stay compliant when you work for yourself.

What is the self-employment (SE) tax?

In addition to federal and applicable state income taxes, everyone must pay Social Security and Medicare taxes. These two social programs provide you with retirement benefits, disability benefits, survivor benefits, and Medicare health insurance benefits.

Many people don’t realize that when you’re a W-2 employee, your employer must pick up the tab for a portion of your taxes. Thanks to the Federal Insurance Contributions Act (FICA), employers are generally required to withhold Social Security and Medicare taxes from your paycheck and match the tax amounts you owe.

In other words, your employer pays half of your Social Security and Medicare taxes, and you pay the remaining half. Employees pay 100% of federal and state income taxes, which also get withheld from your wages and sent to the government.

When you have your own business, you’re typically responsible for paying the full amount of income taxes, including 100% of your Social Security and Medicare taxes.

But when you have your own business, you’re typically responsible for paying the full amount of income taxes, including 100% of your Social Security and Medicare taxes.

Who must pay the self-employment tax?

All business owners with "pass-through" income must pay the SE tax. That typically includes every business entity except C corporations (or LLCs that elect to get taxed as a corporation).

When you have a C corp or get taxed as a corporation, you work as an employee of your business. You're required to withhold all employment taxes (federal, state, Social Security, and Medicare) from your salary or wages. Other business entities allow income to pass directly to the owner(s), so it gets included in their personal tax returns.

You must pay the SE tax no matter if you call yourself a solopreneur, independent contractor, or freelancer—even if you're already receiving Social Security or Medicare benefits.

You must pay the SE tax no matter if you call yourself a solopreneur, independent contractor, or freelancer—even if you're already receiving Social Security or Medicare benefits.

How much is the self-employment tax?

For 2020, the SE tax rate is 15.3% of earnings from your business. That's a combined Social Security tax rate of 12.4 % and a Medicare tax rate of 2.9%.

For Social Security tax, you pay it on up to a maximum wage base of $137,700. You don't have to pay Social Security tax on any additional income above this threshold. However, this threshold has been increasing and is likely to continue creeping up in future years.

However, for Medicare, there is no wage base. All your income is subject to the 2.9% Medicare tax.

So, if you're self-employed with net income less than $137,700, you'd pay SE tax of 15.3% (12.4% Social Security plus 2.9% Medicare tax), plus ordinary income tax.

Remember that your future Social Security benefits get reduced if you don't claim all of your self-employment income.

What is the additional Medicare tax?

If you have a high income, you must pay an extra tax of 0.9%, known as the additional Medicare tax. This surtax went into effect in 2013 with the passage of the Affordable Care Act (ACA). It applies to wages and self-employment income over these amounts by tax filing status for 2020:

  • Single: $200,000 
  • Married filing jointly: $250,000 
  • Married filing separately: $125,000 
  • Head of household: $200,000 
  • Qualifying widow(er): $200,000

What are estimated taxes?

As I mentioned, when you’re an employee, your employer withholds money for various taxes from your paychecks and sends it to the government on your behalf. This pay-as-you-go system was created to make sure you pay all taxes owed by the end of the year.

You must make quarterly estimated tax payments if you expect to owe at least $1,000 in taxes, including the SE tax.

When you’re self-employed, you also have to keep up with taxes throughout the year. You must make quarterly estimated tax payments if you expect to owe at least $1,000 in taxes, including the SE tax.

Each payment should be one-fourth of the total you expect to owe. Estimated payments are generally due on:

  • April 15 (for the first quarter) 
  • June 15 (for the second quarter) 
  • September 15 (for the third quarter) 
  • January 15 (for the fourth quarter) of the following year

But when the due date falls on a weekend or holiday, it shifts to the next business day. Your state may also require estimated tax payments and may have different deadlines.

How to calculate estimated taxes

Figuring estimated payments can be extremely confusing when you’re self-employed because many entrepreneurs don’t have the faintest idea how much they’ll make from one week to the next, much less how much tax they can expect to pay. Nonetheless, you must make your best guesstimate.

If you earn more than you estimated, you can pay more on any remaining quarterly tax payments. If you earn less, you can reduce them or apply any overpayments to next year’s estimated payments.

If you (or your spouse, if you file taxes jointly) have a W-2 job in addition to self-employment income, you can increase your tax withholding from earnings at your job instead of making estimated payments. To do this, you or your spouse must file an updated Form W-4 with your employer.

The IRS has a Tax Withholding Estimator to help you calculate the right amount to withhold from your pay for your individual or joint taxes.

How to pay estimated taxes

To figure and pay your estimated taxes, use Form 1040-ES, Estimated Tax for Individuals, or Form 1120-W, Estimated Tax for Corporations. These forms contain blank vouchers you can use to mail in your payments, or you can submit funds electronically.

When you have a complicated situation, including having business income, one of your new best friends should be a tax accountant.

For much more information about running a small business successfully, check out my newest book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. Part four, Understanding Business Taxes, covers everything you need to know to comply and stay out of trouble.

From personal experience, I can tell you that when you have a complicated situation, including having business income, one of your new best friends should be a tax accountant. Find one who listens well and seems to understand the kind of work you're doing.

A good accountant will help you calculate your estimated quarterly taxes, claim tax deductions, and save you money by helping you take advantage of every tax benefit that's allowed when you're self-employed. In Money-Smart Solopreneur, I recommend various software, online services, and apps to help you track expenses, deductions, and tax deadlines that will keep your business running smoothly.

Source: quickanddirtytips.com

What Causes of Death are not Covered by Life Insurance?

The death of a loved one is hard to take and while a life insurance payout can ease the burden and allow you to continue leaving comfortably, it won’t take the grief or the heartbreak away. What’s more, if that life insurance policy refuses to payout, it can make the situation even worse, adding more stress, anxiety, anger, and frustration to an already emotional period.

But why would a life insurance claim be refused; what are the causes of death that may cause your life insurance coverage to become null and void? If you or a loved one has a life policy, this article could provide some essential information as we look at the reasons a death claim may be refused.

What Causes of Death are Not Covered?

The extent of your life insurance coverage will depend on your specific policy and this is something you should check when filing your life insurance application. Speak with your insurance agent, ask questions, and always do your due diligence so that you know what you’re buying into and what sort of deaths it will provide cover for.

Life insurance policies have something known as a contestability period, which typically lasts for 1 to 2 years and begins as soon as the policy starts. If the policyholder dies during this time, they will investigate and contest the death. 

This is generally true whether her you die of a heart attack, cancer or suicide. However, if this period has passed, they may only contest the death if it results from one of the following.

Suicide

Suicide is a contentious issue where life insurance is concerned. On the one hand, it’s a very serious issue and one that’s often the result of mental health problems, so there are those who believe it is deserving of the same respect as any other illness. 

On the other hand, the life insurance companies are concerned that allowing such coverage will encourage desperate people to kill themselves so their loved ones will be financially secure.

It’s a touchy subject, and that’s why many companies refuse to go anywhere near it. Some will outright refuse to pay out for suicide, but the majority have a suicide clause, whereby they only payout if the death occurs after a specific period of time.

If it occurs before this time, they may return the premiums or pay nothing at all. And if they have reason to believe that the policyholder took their own life just for financial gain, they will almost certainly investigate and may refuse to pay.

Dangerous Hobbies and Driving

If you die in a car accident and it is deemed that you were driving drunk, your policy may not payout. Car accident deaths are common, and this is a cause of death that policies do generally cover, but only when you weren’t doing something illegal or driving recklessly.

Deaths from extreme activities like bungee jumping or skydiving may be questioned, especially if these hobbies were not reported during the application. 

Illegal Acts

Your claim can be denied if you are committing an illegal act at the time of your death. This can include everything from being chased by the police to trespassing. A benefit may also be refused if you die for an intentional drug overdose using non-prescription drugs. 

Smoking or Pre-existing Health Issue

Honesty is key, and if you lie during the application or “forget” to tell them about your smoking status or pre-existing medical conditions, they may refuse to payout. It doesn’t matter if they performed a medical exam or not; the onus is not on them to spot your lie, it’s on you not to tell it in the first place.

This is one of the most common reasons for an insurance contract to be declared void, as applicants go in search of the cheapest premiums they can get and do everything they can to bring those costs down. They may also believe they will get away with their lies, either because they will give up smoking in a few months or years or because they will die from something other than their preexisting condition.

But lying in this manner is risky. You have to ask yourself whether it’s worth paying $100 a month for a valid policy that will payout without issue or $50 for a policy that will likely be refused and will cause endless stress for your beneficiaries.

War

Life insurance benefits generally don’t extend to the battlefield. If you’re a solider on the front line, your risk of death increases significantly, and many insurance policies won’t cover you for this. This is true even if you’re not in active duty at the time you take out the policy. More importantly, it also applies to correspondents and journalists.

You don’t invalidate your policy by going to a war-torn country and reporting, but if you die resulting from that trip, your policy will not payout.

Dismemberment

Your life insurance policy likely won’t pay for dismemberment or critical illness, but there are additional policies and add-ons that will provide cover. You can get these alongside permanent life insurance and term life insurance to provide you with more cover and peace of mind. 

They will come at a significant extra cost, but unlike traditional life insurance, they will payout when you are still alive and may make life easier after experiencing a tragic accident or serious illness.

We recommend focusing on getting life insurance first, securing the amount of coverage you need from a permanent or term life policy, and only then seeing if there is room in your budget for these additional options.

How Often Do Life Insurance Policies Payout?

We have recommended life insurance many times at PocketYourDollars and will continue to do so. We often state that it is essential if you have dependents and want to ensure they’re cared for when you die. But as much as we recommend it and as simple as the process of applying often is, there is one simple fact that we often overlook:

Life insurance companies rarely payout.

It’s a stat you may have seen elsewhere and it’s 100% true. However, contrary to what you might have heard or assumed; this is not the result of a refusal to pay the death benefit when the policyholder passes away. Sure, this accounts for some of those non-payments, but for the most part, it’s down to one of the following:

The Policyholder Survives the Term

The majority of life insurance policies are set to fixed terms, such as 10, 20 or 30 years. If anything happens during this period of time, your loved ones collect your death benefit, but if you survive, the policy ends, no money is paid out, and if you want another policy you will need to pay a larger sum.

The Policyholder Accepts the Cash Value

Whole life insurance policies are like investments crossed with life insurance. Your loved ones get a death benefit if you die, but it also accrues interest and can be cashed out. When this happens, the insurer collects, you get a sum of money, and it feels like a win-win, but in reality, the insurer has just dodged a bullet.

The Policyholder Stops Making Payments

As soon as you stop making your premium payments, you lose cover and you run the risk of your policy being canceled. This is true for pretty much any type of policy and it happens regardless of the policy term. 

Unlike a credit card company, which may chase you for payments, a life insurance company will place the burden of responsibility on you. After all, a creditor loses money when you don’t pay, whereas a life insurance company comes out on top.

This often happens when individuals take out substantial life insurance policies at a young age, only to suffer drastically changing circumstances. Imagine, for instance, that you’re 20-years-old and you buy a house with your spouse-to-be, with a view to settling down and starting a family. You assume that you’ll need it for a long time, so you take out a 30-year-term.

But 10 years down the line, your spouse leaves you, the family you wanted didn’t happen, and you’re all alone with no dependents, and with growing debts, bills, and obligations. At that point, life insurance becomes a burden, so you may stop making payments, thus allowing the insurance company to profit from 10 years of insurance premiums.

Summary: It’s Not That Cut-Throat

You don’t have to look far to find consumers who feel they have been wronged by life insurance companies, consumers who will expend a great deal of time and effort into calling out these companies for their perceived wrongdoings. But they often exaggerate the situation due to their extreme anger and this creates unrealistic anxieties and expectations.

The truth is, while there are people who have been genuinely wronged, they are in the extreme minority. The vast majority of family members who were refused a death benefit were let down by the policyholder and by the lies they told on their policy.

Policyholders lie about their weight, smoking status, and medical conditions, and when caught up in this lie, they often claim they made an honest mistake. But the truth is, most life insurance companies will overlook simple mistakes and only really care when it’s obvious that the policyholder lied. 

And let’s be honest, it doesn’t matter how forgetful you are, you’re not going to forget that you’re a chain smoker, alcoholic, drug user, extreme sports fan or that you recently had a medical crisis!

If the policy was filed honestly, you shouldn’t have an issue when you collect, even if it’s still in the contestability period. As discussed above, life insurance companies stack the dice in their favor. They use statistics and probability to carefully set the premiums and benefits, and they rely on policyholders forgetting to pay and outliving the term. They don’t need to “rob” you in order to make a profit. So, be honest when applying and you won’t have anything to fear.

What Causes of Death are not Covered by Life Insurance? is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

Will You Ever Be Able to Save Enough for Retirement?

retirement election year

With the stock market still in roller coaster mode and more and more companies reducing or eliminating retirement benefits, many people—from Boomers and Generation Xers to savvy Millennials—are facing the fact that they need to seize control of their retirement financial plan. And they need to do it sooner rather than later.

Boomers in particular are quickly realizing that the landscape for long-term savings has changed dramatically since they signed up for their 401(k)s in the 1970s, 1980s or 1990s.

Planning wasn’t as crucial back then, said David Krasnow, 44, President/CEO of Pension Advisors in Cleveland. ”Between pension plans, 401(k)s, and home equity, it was assumed that the continual growth of investments and home value together with Social Security would provide plenty of money when employees stopped working,” he said. With a formula that basic, professional planners didn’t need deep investment expertise to deliver solid results.

“There were few certifications or fee disclosure requirements,” Krasnow pointed out. “The same person who sold you health insurance might sell you an investment program.”

That laissez-faire approach might have worked for people who worked, uninterrupted, until 65 (not facing protracted periods of unemployment) and not as contractors and/or part-timers or small-business owners.  It worked when the stock market produced steady 8% gains per year, not tumultuous volatility. It worked when companies offered generous 401(k) matches—and stayed out of bankruptcy to actually fund pensions. And it worked when home property values were growing—or at least stable.

But it doesn’t work now, and this is why:

  • We can’t assume continual growth of investments or home equity. Nor can we count on Social Security to be solvent 30-40 years from now.  That’s the new economic normal.
  • We’re anticipating living longer, staying active longer (which influences spending and other financial considerations), and with advancing age, facing the likelihood of considerable medical-related expenses.
  • Our parents are living longer.  Boomers looking to retire may want to help fund their parents’ later years as well as their own. And, of course, there’s the question of children and grandchildren, and whether (and how much) to spend on them when you don’t have a full income.
  • Traditional pensions or other employee-sponsored retirement plans may not be sufficient sources of retirement funds.
  • Investment products are more plentiful and more complex (read: confusing) than ever.
  • Retirees often continue working long past their 60s, which affects traditional assumptions about how much savings is needed when they do stop working.

So what does all of this mean for anyone intent on building a solid retirement financial plan?

1. Recognize the Need for a Professional Adviser

“In a constantly improving market I used to be able to manage my mutual fund investments on my own,” said Peter Doris, 66, a career and nonprofit expert from Philadelphia.  “Now I need a professional’s help. It isn’t just a question of putting money aside.  It’s a question of being really smart and current about each investment, and I simply don’t have the time or the background.”

2. Do Your Homework

“There is a minimum set of skills and knowledge base you must have, even if you use a professional,” said Jim McGrath, an Executive Vice President of Law and Administration, 67, in Orland Park, Ill. “Take seminars, do online research and read up so that you have solid financial literacy,” he suggests.  “You can’t make informed decisions without fully understanding your choices, their projected outcomes and their potential risks.”

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3. Be on the Same Page With Your Significant Other

If you’re married or in a relationship, make sure both spouses/partners are in agreement about life planning, investment objectives, reasonable returns and levels of acceptable risk. “My wife and I built our business together,” said Ted Vlamis, 78, an active CEO in Wichita. “She knows the numbers, so there are no surprises. We know that the chances are good that one partner will outlive the other, and any survivor shouldn’t be blindsided by financial problems they knew nothing about … or have to face, unprepared and grieving, the host of decisions that have to be made about a business or an investment portfolio.”

4. Own It

Dr. Deborah Ewing-Wilson, 58, a neurologist in a large Ohio medical system, advises people to “give the same due diligence to their personal and financial lives that they give to their work and businesses.”  It’s time-consuming and sometimes tedious, she admits, but then again so is taking care of one’s health.  “I’m here to help educate, recommend, and advise, but I can’t take responsibility for anyone else’s behavior or decisions,” she says. “It’s the same with a financial plan.”  In other words, it’s your money, your plan, your life.

5. Start Now

“Find a professional you trust, start saving as soon as you can, and stay on top of your plan, ready to make decisions as markets–and your life—evolve,” says Rich Iafellice, 57, vice president of an engineering services firm near Akron. He suggests working with an adviser who works on a fee basis, not on a percentage of growth of your portfolio.  “That way they’re focused solely on your needs and risk tolerance, not the potential for them to make big profits off of a portfolio that might be too ambitious for your comfort.”

Two last caveats: When shopping for an investment adviser, look for the designations CFP (certified financial planner), PFS (personal financial specialist) and CFA (chartered financial analyst). Anyone with these credentials has to have completed training from an accredited body, and passed rigorous exams demonstrating their competence. Certification is only one indicator of ability, however. The real test is whether an adviser has been successful for an extended period of time and is recommended by people you trust and respect.

More Money-Saving Reads:

  • What’s a Good Credit Score?
  • How to Get Your Free Annual Credit Report
  • What’s a Bad Credit Score?
  • How Credit Impacts Your Day-to-Day Life

Image: RomoloTavani

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Source: credit.com